Finance

Principality pays 4% rate on kid's savings that doesn't expire at 18


Encouraging children to get into the saving habit is an important part of life – and one building society is offering a bumper four per cent rate for doing so.

Principality Building Society, Wales’ biggest mutual and the sixth-largest in the UK, has launched the deal this week. 

Its ‘Learner Earner’ savings account – a slightly unusual offering fronted by a cartoon dragon that pays an eye-catching interest rate, does come with some drawbacks however. 

One being that you’ll need to open it at one of its 53 branches or 17 agencies.

Welsh building society Principality has launched a top-rate paying account for children

Welsh building society Principality has launched a top-rate paying account for children

Though this is likely to compete with Junior Isas offered by the likes of Coventry Building Society and NS&I, Principality’s offer is a regular child savings account, not an Isa. It does, however, have a £20,000 maximum balance.

The account has to be opened by a parent in conjunction with a child under the age of 18. 

It is a monthly savings account, with a maximum deposit of £250, though you don’t need to make a deposit every month. You can make three withdrawals each calendar year. 

The maximum balance of £20,000 also means if you put the top amount in each month, you’d hit the cap by the time your child is seven.

On the flipside, if you had a £20,000 target for when your child reaches 18, you’d need to find a monthly deposit of £92.60 to do so.

Principality Building Society's new 'Learner Earner' account comes with interactive activities and a storybook featuring Dylan the dragon, designed to engage children in the habit of saving

Principality Building Society’s new ‘Learner Earner’ account comes with interactive activities and a storybook featuring Dylan the dragon, designed to engage children in the habit of saving

Furthermore, the restriction on the amount you can deposit each month potentially makes it less attractive than a Junior Isa, which has an annual allowance of £4,368 in the 2019-20 tax year; £1,368 more than the maximum you can deposit in Principality’s account.

On top of the interest rate, for the first two years, savers will receive a £10 annual cheque that can either be deposited into the account or cashed out. 

It is also worth noting the interest rate is variable, meaning the four per cent offer could be cut further down the line.

Principality say the whole point of the account is to help younger children develop better knowledge about money.

The account comes with a number of activities, including one that asks kids to match up financial words with their definitions

The account comes with a number of activities, including one that asks kids to match up financial words with their definitions

Those aged between five and 11 who have an account opened for them will get interactive learning packs.

One activity asks children to match up words like ‘interest’ and ‘budget’ with their definitions, and a savings jar – all of which feature the popular Welsh children’s cartoon character Dylan the dragon.

Most eye-catchingly of all, unlike a Junior Isa which becomes a bog standard cash Isa once a child turns 18, Principality’s offer will continue to pay four per cent on the balance even after your child becomes an adult – if the rate hasn’t changed by then.

While the £20,000 balance restriction does provide some mitigation against those trying to game the system, it does mean that someone who has an account opened for them as a child could turn 18 and still have access to a savings account paying nearly three times the top easy-access rate currently available.

It also comes with a savings jar, encouraging account holders to work out what they're saving for and how much it will cost

It also comes with a savings jar, encouraging account holders to work out what they’re saving for and how much it will cost

All of Principality’s branches are either in Wales or very close to the border, meaning those in Chester, Shrewsbury and Hereford will also have the ability to open an account.

If you do want to take advantage of the offer, make sure you get in quick. 

Principality say the offer is designed to last for three months before it closes, but if demand is high – and you would think it would be given the headline rate – then it will likely be gated sooner.

Tax and children’s accounts 

Because Principality’s account is a regular child savings account, not a tax-free Junior Isa, you need to be aware of some peculiar tax rules.

Children can earn money from savings interest and dividends from shares and in theory if it is below the personal allowance of £12,500 they would pay no tax.

There is a catch though. Children can only earn up to £100 in interest or dividends a year tax-free on money gifted by their parents or step-parents.

If it generates income above this, then tax will be charged at the parent who gifted the money’s tax rate.

The parent’s savings allowance, of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, can be used to cover this but if they have used that up then tax will be charged to them at their tax rate.

For example, if you are a parent who is a basic rate taxpayer already earning £450 a year in interest and then depositing money into Principality’s account for your child, you could achieve a sum that paid £650 a year in interest tax-free.

Any more than that and any additional interest your child receives will be subject to a 20 per cent tax rate

The idea here is to stop parents salting money away in childrens’ accounts but with a £20,000 annual Isa allowance and £1,000 savings allowance this looks like a bizarre anachronism.

Money given by grandparents and other adults is not subject to this cap.

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